Aave Loses DeFi Lending Lead Amid Crisis, Spark Gains Ground

Original | Odaily Planet Daily (@OdailyChina)

Author | Azuma (@azuma_eth)

$292 million, the total amount of rsETH stolen from Kelp DAO; $17.2 billion, the amount of funds that have flowed out of Aave since the incident.

Aave is allowing community panic to escalate over several days due to its extremely poor crisis communication strategy, thereby losing its former key advantage in the lending space—the hundreds of billions of dollars in locked capital and the user perception of being “the safest DeFi.”

• Odaily note: For background, see “DeFi Again Stolen $292 Million—Is Aave No Longer Safe?” and “The Three-Way博弈 Under a $290 Million Hole: Who Will Pay Up—Aave, L0, or Kelp?”

Details regarding the Kelp DAO hack are no longer necessary to reiterate, and blaming Aave for granting rsETH such a high LTV is now meaningless; here, I’d like to discuss Aave’s response strategy from the perspective of a long-term AAVE user.

First, there is the issue of bad debt scale. Aave itself has conducted an analysis. Depending on different scenarios for handling rsETH, there could be two possible bad debt outcomes—if the stolen losses are written off against all circulating rsETH, an estimated $123.7 million in bad debt would be generated; if the value of mainnet rsETH is protected and all losses are absorbed by the mapped version of rsETH on Layer 2, an estimated $230.1 million in bad debt would be incurred.

In any case, Aave has the financial capacity to cover this, thanks to Umbrella, the DAO treasury, and the team’s reserves. I understand that Aave would prefer not to bear the cost itself and would rather see the primary responsible party, Kelp DAO, and the secondary party, LayerZero, contribute more. However, the issue is that the other parties will think the same way: “Aave is so well-funded and in such an awkward position—it should shoulder more of the burden.” As a result, in the short term, it will be very difficult for these three parties to reach a consensus, meaning a mutually satisfactory solution is unlikely for now.

Users simply can’t wait this long—Aave’s yield levels have never been competitive in the industry; users deposit with Aave for its reputation, security, and liquidity. But now, in the most critical days following the incident, Aave never offered any kind of safety guarantee to users, instead repeatedly shifting blame by insisting “our code is fine” and “Aave has no control over how rsETH is accounted for.”

This is why panic continues to spread throughout the community, as users go to great lengths to escape risk—those who can withdraw do so immediately, while those who cannot try borrowing from other pools, causing the impact to grow progressively. As a result, Aave is now facing continuous outflows of funds alongside liquidity shortages in multiple pools due to fully saturated utilization rates.

This awkward situation could have been avoided (at least not to this extent)... Since Aave can afford it, why not have provided the community with a reassuring injection of confidence from the start to prevent the run? It’s just a maximum of $230 million in bad debt (possibly less), and this cost wouldn’t have to be borne solely by Aave—dealings with LayerZero and Kelp DAO could follow later.

Now, for a promised relief of up to $2.3 billion, Aave has watched $17.2 billion in locked funds drain away (figures may continue to rise), not to mention the recent decline in the AAVE token price... no matter how you calculate it, it’s a devastating loss.

What makes Aave’s situation even more difficult is that the more strained its position becomes, the more composed its counterparts like LayerZero and Kelp DAO will be, as they anticipate Aave will be even more motivated to resolve the issue quickly—only further weakening Aave’s position in the negotiation.

At this point, Aave has brought it upon itself.

While Aave struggles, its competitor Spark is thriving with great momentum. What’s more poignant is that Spark is precisely the competitor “hatched” by Aave itself.

Spark was originally forked from Sky's (formerly MakerDAO) open-source code based on Aave V3, meaning both platforms use the same underlying code logic. In return, Spark and Aave once had a profit-sharing agreement, but Aave later accused Spark of breach of contract, and due to diverging roadmaps, the two are now purely competitive.

Three months before the Kelp DAO hack, Spark had just removed support for rsETH (see “Different Fates on the Same Day: Aave Suffered Nearly $200M in Losses While Spark Escaped Unscathed”). Whether you call this strategic conservatism, rigorous risk management, or pure luck, the result is that Spark was unaffected by this incident—on this point alone, Spark can boldly challenge Aave’s former label as “the safest DeFi.”

As a result, Spark became one of the safe havens for Aave’s capital outflow. Since the incident, Spark’s TVL has increased by nearly $2 billion (green portion in the chart below). On the day of the incident, Sun Zhuochen withdrew 53,665 ETH (worth $124 million) from Aave and deposited it into Spark; in recent days, after further accumulation, his total deposit has reached $1.3 billion—in the DeFi world, Sun’s moves are truly worth learning.

On April 23, Upbit officially launched the SPK/KRW trading pair, prompting SPK to surge over 80% in a single day, significantly narrowing the market cap gap between SPK and AAVE.

Even Wang Chun, founder of Fish Pool, lamented on X: "Over the past year, I received 83.7 million SPK rewards from Spark and sold them on CoWSwap, acquiring 663 ETH and $1.4 million. I now somewhat regret it."

Spark clearly recognized this as a prime opportunity to seize market share from Aave. Since the incident, Spark’s strategy lead, MonetSupply, has become one of the most frequent voices on the topic, posting dozens of times per day. While their comments have helped the public understand what happened to some extent, they have also objectively intensified the panic surrounding Aave.

But this is pure business competition—MonetSupply simply made the right choice.

In the early hours of April 24, perhaps recognizing the severity of the current situation, Aave founder Stani announced on X the launch of a relief initiative called DeFi United, with participating partners including LayerZero, Ethena, ether.fi, Ink Foundation, Golem Foundation, Trydo, and others. Stani will also personally donate 5000 ETH to address the current challenges.

The funds have already been lost, and user trust has been severely damaged. Even with this belated statement, Aave will find it difficult to quickly recover the locked funds and user trust.

The DeFi lending sector has long been characterized by a "one-superior, many-strong" landscape, with Aave maintaining what seemed like an extremely solid lead. But now, Aave has relinquished its throne. Behind it, challengers are advancing aggressively—besides the rapidly growing Spark, other competitors such as Morpho and Jupiter Lend also aim to take a share of Aave’s market.

Last year, Stani purchased a five-story mansion in London for approximately $30 million, one of the most expensive transactions in the UK’s sluggish luxury property market over the past year. I don’t know if there’s something like a “jinx” out there, but given examples like Su Zhu, it seems that big names in the industry who make flashy purchases often run into bad luck.

I can't guess what Stani is thinking now in his five-story mansion.